CAN PROPERTY - REAL ESTATE CREATE WEALTH FOR YOU?

Given
the level of unsold inventory, the real estate market is a bubble
waiting to burst.

Any
investment vehicle that has low yield on investment tends to rely on
capital appreciation as its source of growth and return. Over time,
real estate has become increasingly unattractive as a yield
generating investment vehicle, as residential rental yields have
dropped to less than 2% in most Indian cities.

The
answer lies in the expected capital appreciation on properties.
Investors believe that the scarcity of land coupled with India's
burgeoning population will cause demand to be consistently higher
than supply, thereby leading to price appreciation, resulting in
wealth creation.

However,
a look at the inventory of unsold residential apartments across the
main cities in India will serve as a counterpoint to this widely held
notion.

The
data clearly shows that the belief of excess demand over supply
having the potential to create capital appreciation is being
challenged, given the juggernaut of supply piling up across the
country.

Feroze Azez, Anand Rathi Private Wealth Management

So,
let alone capital appreciation, it will be difficult to keep prices
at current levels.

While
individual investors may have the holding capacity and might survive
this by pocketing the 2 to 3% rental yield, the supply coming from
individual investors has never been a determinant of property prices.

It
is, in fact, the supply by builders that will determine the fate of
returns.

Builders
have the capacity to hold prices as long as their financial health is
good.

However,
according to a recent study, most builders are facing severe
financial crisis.

Consider,
for instance, DLF, which has lost close to 90% of its net worth over
the last seven to eight years alone. Across the board, firms like
Unitech, HDIL, Parsvanath, and Hubtown have the same story to tell.
Given the market conditions at present, builders do not have adequate
holding capacity.

As
far as demand is concerned, it has been muted for the past two years.
This is largely because investors have become overweight in terms of
real estate. RBI data about the savings of Indian households shows
that he money spent by households on physical assets such as gold and
real estate stood at 50 to 51% in the mid-2000s, but went up to
nearly 70% in 2012-13.

Given
that investors have overbought in the real estate space, purchases
have slowed down, with many looking at selling their holdings in
order to cre ate some liquidity.

According
to a recent report by real estate research firm Liases Foras, with
supply being at the present level, it will take more than three years
to clear the current inventory, given the muted demand.

Even
RBI Governor Raghuram Rajan is of the view that the real estate
market is a bubble.

In
an address delivered on 20th August 2015, Rajan stated, “Real
estate is now a bubble. It has to be burst before many ordinary
people get sucked into it“.

It
would therefore be wise for investors to stay away from real estate
as a wealth creation tool, at least for the next four to five years.